governance, political economy, institutional development and economic regulation

Posts tagged ‘Reliance’

Scaling up is the name of the game in politics and in business. The BJP secured enviable gains in the early 2017 municipal elections in Maharashtra and Odisha. A win in the Goa state election is likely. A possible, albeit messy, near-win in Uttar Pradesh and potential inroads into Karnataka, Tamil Nadu and West Bengal portend that the Narendra Modi juggernaut is rolling out a massive, vertically integrated consolidation of party votes across the three levels of government.

Big, deep pockets business is in

In business, too, big is beautiful. Government banks and oil companies are being merged into competitively-sized entities. Reliance, India’s second biggest company by market capitalisation, after Tata Consultancy Services, still rankles at the loss of the top position due to faltering gas production. It is now hitting back at the fragmented competition in telecom, targeting an aggressive 50 per cent share by 2021.

Bigger publicly owned enterprises and bigger government is the inevitable option if private investment response is weak

The government sector too is expected to grow. Some of this is dictated by the compulsions of the faltering international economy. Private capital is risk averse when returns are dodgy. Public capital then is the only option. India is terribly under-capitalised in network and social infrastructure. We spend less than one half of what we should to get rid of the infrastructure constraints on growth and security. The government’s budget needs to expand by at least one-fourth to accommodate the necessary capital spend. FY 2017-18 is not budgeted to be different from the past. There is not enough time before the 2019 general election for grounding project plans into reality. Jobs will consequently be funded by public finance.

Citizen anxiety at being left out in the cold

Should citizens and consumers then be apprehensive about the drive to consolidate and grow across government and business? Not really. Dominance is a systemic outcome of competition. Institutional safeguards can ensure that dominance is not misused to dilute citizen and consumer interests. The scale of operations should be a matter of choice, not compulsion, or the outcome of regulatory nudges. Citizens should rather be concerned that decent jobs won’t come unless businesses and government grow to scales dictated by market parameters.

Multiparty politics only means larger ballot boxes

The political architecture is similarly fragmented. A loose law allows a mind-boggling 1,452 political parties to be “registered” by the Election Commission under the Representation of the People Act 1951. Only 54 parties are recognised at the state level and just six are national parties. Recognition has stricter norms linked to voter share and elected candidates. Believe it or not, the commission’s powers to de-register moribund parties are not explicit.

Multi-party politics has become a fetish, far beyond its usefulness to the average voter. Tightening up on representational norms is possible without diluting the basic freedom to choose one’s political party. Just gearing up the disclosure, internal governance and accounting requirements, to the levels required for companies, can reduce the number of registered parties.

Smart regulation can weed out frivolous parties

Enforcing regulatory compliance can deter frivolous registration and ensure responsible representation. This is illustrated by the experience of companies. Of the 16 million commercial entities operating in India, just one million are registered under the Companies Act 2013, despite the benefits which accrue from registration. It is not as if only large commercial entities choose to get registered. 66 per cent of companies are very small with an authorised share capital below Rs 1 million or just $15,000. But the widespread reluctance to register is because of the accompanying higher levels of disclosure required. Political parties would respond similarly. Only the most serious ones would remain registered if regulatory requirements were increased in the public interest.

Political consolidation as a public good.

Why should we think of political consolidation as a public good? Our fractured and divisive social architecture provides ready opportunities for exploitation of the cleavages for narrow political purposes. We must make it difficult for parties. which cater solely to narrow agendas. Social inclusion fundamentalists would rebel against any institutional constraint on the freedom of a political party to represent even marginal views. But look at the trade-offs. Caste and religion find no place, in our Constitution, as legitimate grounds for political mobilisation. Introducing institutional mechanisms which encourage broad-banding of political platforms is therefore legitimate.

Mandate rainbow nominations for inclusive politics

One way to ensure such broad-banding across castes and religions is to mandate that parties must replicate the prevailing rainbow of castes and religions while nominating candidates in specific jurisdictions. Savvy political parties are already doing so. The BJP broadened its appeal to dalit and backward caste voters in Uttar Pradesh (2017). A quarter of Bahujan Samaj Party candidates are Muslims to demonstrate Mayawati’s good faith while seeking Muslim support. The Samajwadi Party’s tieup with the Congress broadens its appeal to dalits and upper castes — both long-time supporters of the Congress.

In a fragmented political market, institutional compulsions to broaden the electoral base can be an effective catalyst for consolidation. This would be a welcome change from the minimalist strategy of securing the largest number of votes polled by splintering your opponent’s vote share below your own.

Leave room to grow

Limiting governmental and private sector dominance by constraining their ability to grow has negative social and economic outcomes. We barred Facebook from giving free access to a limited Internet space in 2016 due to the misplaced fear of deep pockets-driven future dominance. E-commerce — similarly driven by deep pockets — has somehow bucked the tendency to protect incumbents. Institutional reform to regulate big institutions is overdue. Smart laws and empowered regulators can sift destructive dominance from scaling up for efficiency enhancement. Bulking up is the international trend. We cannot but conform.

Elections are around the corner. Babus are petrified of taking decisions. But government is burning the midnight oil to grant “relief” to Reliance, Tata and Adanis to compensate for the poor planning and foresight of these companies under the guise of “protecting consumer interest”.

The Central Electricity Regulatory Commission (CERC) decided in April 2013 that Tata and Adani (coal based mega power plants in Gujarat) should be permitted to rupture their agreement with Gujarat and Haryana to supply electric power. The reasoning was that the cost of imported Indonesian coal had increased more than could not have been foreseen. A dissenting order by a member; Mr. Jayaraman points out that nothing in the bidding document compelled these companies to bid a fixed tariff. They could have opted to bid a variable tariff, which would have passed through the changes in fuel cost; both increase and decrease. They choose not to do so and hence forfeit their commercial rights to come back for a tariff revision. Other bidders whom they outbid did opt for variable costs and possibly were outbid on these grounds. We will never know for sure since bid details are not publicly shared on the net which incidentally is bad procurement practice.

The argument of acting in consumer interest is even more farcical. It states that since the bid tariff is no longer commercially viable, sticking to it would force the developers to abandon the project. No mention here of the penalty the developers would have to pay if they were to quit. No mention either that NTPC could happily buy the projects, just as it bought the ENRON project or Delhi Metro took over the Reliance Delhi Airport metro line when it did not make expected profits or that the National Highway Authority may have to take over the Gurgaon Expressway. The CERC argument is that the new developer would in any case have to charge more to consumers so why not just do a deal with the existing developers, since the poor consumer would have to pay more in any case. Sounds familiar to us aam admis and aurats (AAA) a circular argument which suits everyone except us. If a “deal” is to be done non-competitively then let us do it with the public sector. At least the resultant earnings will accrue indirectly to the MOF

Allowing such retro tariff revisions in competitive bidding not only knocks the concept out of the window, it is rich future pickings for CAG, CVC and CBI. To dilute this possibility the favorite ploy of babus has become to kick the problem over to an irreproachable, external entity; in this case Deepak Parekh of HDFC, who is in danger of fast becoming the MMS of Indian Gas and Power. Deepak apparently has headed (we don’t really know since neither the Gujarat nor the Haryana Government websites tell us about this) a committee, mutually agreed between the developers and the procuring state governments, to work out what should be done. This report has been submitted to the CERC in mid-September 2013, but is not on the website of CERC and even worse has not been made available to PRAYAS a NGO specializing in energy and water, which is on the Advisory Board of the CERC. See their plaintive cry for information: http://www.livemint.com/Industry/9NOJM6JwuwPwAw2i2l0DFP/CERC-suggested-to-hold-public-hearing-on-tariff-issues.html.

The implication us AAAs will draw is that had Mr. Jayaram not dissented, the CERC would have meekly passed through the additional cost to consumers. My Jayaraman, consequently, whilst not a whistle blower, since there is no allegation of graft, is certainly a rudder for the Rule of Law prevailing over egregious commercial considerations. In September 2013 Ministry of Power amended its tariff guidelines by making fuel cost a pass through. The term “pass through” is intriguing because it seems to undercut the powers of the CERC to determine tariff in a holistic manner. The new guidelines only require the power developer to be prudent while purchasing fuel. Fuel cost can constitute 50 to 70% of the tariff. Well known transfer pricing tricks, especially in imported fuel, militate against relying on a broad test of “prudence”, to protect consumer interest sufficiently.

A similar tactic has been adopted in gas production, where the price at which Reliance will sell its gas has doubled (by the cabinet this time) on the argument that the government administered price is far lower than the prevailing international price for gas. This being true does not explain why Reliance has failed to meet its investment commitments which are the prime reason for a decrease in gas production way below the optimum levels. Even worse, the Ministry of Petroleum’s view is falling on deaf ears that retro advantage of gas price increase should not be given to Reliance on prior production commitments. All this again in the interest of consumers, ofcourse, who in the absence of a deal with Reliance, would have to pay imported prices for gas! Admittedly, Reliance (like Enron) has the disadvantage of its public image working against it. Any babu ruling in Reliance’s favor, is automatically suspect in the eyes of us AAA’s though, mysteriously, very few babus who have the guts to do so, live to regret their decisions.

As in the case of power, a committee headed by Mr. Kelkar, aided by the hapless and overworked Mr. Parekh is meanwhile looking at the gas pricing regime. Oddly, as in power, the entire exercise is being conducted in the cozy confines of the government, CII, an NGO which ostensibly works on fuel studies and research (but for which not a single paper comes up in a Google search) and the Boston Consulting Group (BCG), a consultancy. Presumably BCG was appointed after a competitive bid. We will never know because such trivia is never shared with us AAA’s. The entire oil exploration and production process is kept tightly under wraps. Exploration, development and production contracts are never made available on the website and “commercial confidentiality” conditions of the developer are routinely cited as a reason.

The international literature on natural resource management is rife with the need to introduce transparency and citizen participation in this sector. The reason is obvious. Oil and gas contracts involve huge sums paid and received between private developers and government. If AAA’s are not kept informed of what were the obligations of the developer versus actual delivery on the one hand and what was owed to the government and what was actually received, the instant apprehension is potential leakage of government revenue or of motivated bias in favor of the developer. Compare our non-transparent and secret regime for the oil and gas production sector with what even Ghana puts on the web: http://www.gnpcghana.com/_upload/general/saltpondfield_sopcl.pdf. Key details of the contracts and delivery on commitments, including penalties levied for shortfalls in developer obligations. In 2012 the EU made it compulsory for all extractive industries (including oil and gas firms) to share data publiclly on revenue and payments to governments. http://europa.eu/rapid/press-release_MEMO-13-541_en.htm.

The governments of India, Gujarat and Haryana all profess a commitment to “good governance”. The essence of good governance is to expand access to information for the public and to encourage their direct participation in decision making. True AAAs, like me, are clueless on technicalities like a Gas Production Sharing Contract but we sure like to be kept informed and we have technical experts who can work in our interest, independent of governments. Democracy is all about giving people a choice. Give us the information and let us use it the way we want to. Please don’t hide behind the shield of the RTI (which allows notional access to information) and force us AAA’s to seek hard copies of information from the relevant ministries. If the websites of governments have the space to trumpet their many achievements, surely they can also instantly share with us information on what contracts have been signed, with whom and the key obligations therein?

When you light a lamp, it illuminates everything around it. Please light a lamp in Indian power and gas deals.